When planning a new business, the first legal choice usually is "which entity to form?" There are many choices these days, but let's focus on the Top 4: General Partnerships, Limited Partnerships, Corporations, and Limited Liability Companies.

1. CORPORATIONS
MODULE III: ENTREPRENEURSHIP
LESSON 1: ORGANIZATIONAL CHOICES
Professor Seth C. Oranburg
Duquesne University School of Law
Spring 2020

2. Learning Objectives:
■ Explain the seven key aspects of four types of business
organizations:
– General Partnership (GP)
– Limited Partnership (LP)
– Corporation (C Corp)
– Limited Liability Company (LLC)
■ Apply organizational choices to the most common business
use cases
■ Recall which organizational choices are used for professional
groups and investment groups, and understand why

3. “Alphabet Soup”
GP
LP
LLP
LLLP
C Corp
S Corp
B Corp
LLC
L3C

4. 7 Legal Issues in Business
Planning
1. Formation
2. Liability
3. Control Rights
4. Financial Rights
5. Continuity
6. Liquidity
7. Mergers

5. Key Organizational Choices
1. General Partnership (GP)
2. Limited Partnership (LP)
3. Corporation (C Corp)
4. Limited Liability Company (LLC)

6. Key Organizational Choices
GP LP
C Corp LLC

7. Specialty Choices for
Professional Groups
■Limited Liability Partnership (LLP)
■Professional Corporation (PC)
■Professional Association (PA)

8. Specialty Choices for
Investment Groups
■Limited Partnership (LP)
■Limited Liability Limited
Partnership (LLLP)

9. General
Partnership
(GP)
Cheap
Easy
Time Tested
Unlimited Liability

10. Enactment Status of the Revised Uniform Partnership Act (RUPA)

11. RUPA § 101(6)
■“Partnership” means an
association of two or more
persons to carry on as co-
owners a business for profit

12. Legal Issue # 1 – Formation:
General Partnership
■ Created by
agreement
– No filing required
■ Can be created
inadvertently by
action

13. RUPA § 202(a)
■Any association of two or more
persons to carry on as co-owners a
business for-profit forms a
partnership, whether or not the
persons intend to form a partnership.

14. Legal Issue # 2 – Liability:
General Partnership
■ Partners have
personal liability for
debts and torts of
the partnership
■ Joint and several
liability with
indemnity

15. Legal Issue # 3 – Control Rights:
General Partnership
■ Equal rights
– 1 partner =
1 vote
■ Majority rule
– Deadlock may
lead to
dissolution

16. Legal Issue # 4 – Financial
Rights:
General Partnership
■Equal share
in profits
and losses

17. Legal Issue # 5 – Continuity:
General Partnership
■ UPA: Withdrawal leads
to dissolution
– Aggregate theory of
p’ship
■ RUPA: Withdrawal
leads to buy-out
– Entity theory of
p’ship

18. Legal Issue # 6 – Liquidity:
General Partnership
■ Control rights are not
transferable without
the consent of the
partnership
■ Financial rights (rights
to receive profits) are
freely transferable

19. Legal Issue # 7 – Mergers:
General Partnership
■ Mergers between
GPs are easy –
simply combine
assets by
agreement
– No filing
required

20. Limited
Partnership
(LP)
Classic Investment
Vehicle
Unequal roles:
- Strong Central
Management (GP)
- Passive Investors
(LPs)

21. Why Use an LP?
■Limited partners can invest
money without having to
manage it
■LPs risk only what they
invested – no personal
liability
■Secures skills and
cooperation of those with
ability and integrity but
insufficient money

22. Enactment Status of the Re-Revised “Uniform” Limited Partnership Act
(Re-RULPA)

23. Legal Issue # 1 – Formation:
Limited Partnership
■Filing required
– GPs are
named
– LPs are
not named

24. Legal Issue # 2 – Liability:
Limited Partnership
■ GP has personal liability
for debts and torts of the
partnership
– Although GPs can gain
a liability shield by
using a “blocker
corporation”
■ LP’s liability is limited to
the amount invested

25. Legal Issue # 3 – Control Rights:
Limited Partnership
■ LPs cannot participate in
management
■ RULPA (1985): Control
Rule
– Active LPs may forfeit
limited liability
■ RULPA (2001: Rule (PA)
– Active LPs do not
forfeit limited liability

26. Legal Issue # 4 – Financial
Rights:
Limited Partnership
■Profits allocated
according to
contributions
made and not
returned

27. Legal Issue # 5 – Continuity:
Limited Partnership
■ The LP Agreement must
specify an end date
■ RULPA (1985):
Withdrawal of any GP
leads to dissolution
■ RULPA (2001), PA:
Withdrawal of all GPs
leads to dissolution

28. Legal Issue # 6 – Liquidity:
Limited Partnership
■ Control rights are
not transferable
without the consent
of the partnership
■ Financial rights are
transferable

29. Legal Issue # 7 – Mergers:
Limited Partnership
■ Mergers between
LPs require the
consent of all
partners,
including the
limited partners

30. Corporation
(C Corp)
Separates Ownership
from Control
(Hierarchical)
Perpetual Existence
Double Taxation
Time Tested

31. There Is No “Uniform” Corporate Law

32. Legal Issue # 1 – Formation:
Corporation
■Filing required
■Registered
Agent required
if not located in
state of
incorporation

33. Legal Issue # 2 – Liability:
Corporation
■ Shareholders have
limited liability
– Except when the
corporate veil is
pierced
■ Directors have liability
to shareholders for
breach of fiduciary
duties

34. Legal Issue # 3 – Control Rights:
Corporation
■ Shareholders elect
management Board of
Directors
■ Board approves
“extraordinary”
transactions and appoints
Executive Officers
■ Executive Officers run
day-to-day operations

35. Legal Issue # 4 – Financial
Rights: Corporation
■ Dividends distributed “pro
rata”
– According to percent of
shared owned
■ Shareholders have no
right to demand a
distribution
– Only the Board may
declare a dividend

36. Legal Issue # 5 – Continuity:
Corporation
■ Perpetual existence
■ Dissolution permitted
by agreement
– Requires board
recommendation
and shareholder
approval

37. Legal Issue # 6 – Liquidity:
Corporation
■ Share are freely
transferable in theory,
but in practice are
subject to many
transfer restrictions
– Private transfer
restriction
agreements
– Securities
regulations

38. Legal Issue # 7 – Mergers:
Corporation
■ File a Certificate
of Merger

39. Limited
Liability
Company
(LLC)
Flexible
Customizable
Relatively New

40. Enactment Status of the Revised “Uniform” Limited Liability Company
Act (RULLCA)

41. Legal Issue # 1 – Formation:
Limited Liability Company
■Filing required
– Article of
Organization
■Members
enter into an
Operating
Agreement

42. Legal Issue # 2 – Liability:
Limited Liability Company
■Members
are only
liable up to
the amount
they invest

43. Legal Issue # 3 – Control Rights:
Limited Liability Company
1. Manager-managed
– Centralized like a corporation
– Manager makes day-to-day
decisions as an agent of the
company
– Members only participate major
decisions (and are not agents)
2. Member-managed
– Decentralized like a partnership
– All members have authority to
manage and bind the company in
ordinary matters
– All members are agents

44. Legal Issue # 4 – Financial Rights:
Limited Liability Company
■ Some statutes provide for
equal sharing; others specify
pro rata sharing based on
contributions
■ Statutes generally require that
distributions be approved by all
the members
■ Members generally have no
rights to distributions
– Distributions must be
approved by manager or
majority of members

45. Legal Issue # 5 – Continuity:
Limited Liability Company
■ Perpetual existence
■ Impact of withdrawal of
member varies by state:
– RULLCA: LLC buys
interest of member
who dissociates (PA
Title 15, § 8933)
– ULLCA: no withdrawal
allowed unless allowed
in LLC agreement

46. Legal Issue # 6 – Liquidity:
Limited Liability Company
■ Only financial interest
is transferable
■ Governance rights
are not transferable
without consent of all
the members
– RULLCA

47. Legal Issue # 7 – Mergers:
Limited Liability Company
■ Permitted in most
states
■ Plan of Merger
must be approved
by all members
and filed with the
state

48. Sole Proprietorship
■A business in which one
person owns all the assets,
owes all the liabilities, and
operates in his or her
personal capacity

49. Limited Liability Partnership (LLP)

50. 1.
Formation
2. Liability 3. Control
Rights
4. Financial
Rights
5. Continuity 6. Liquidity 7. Mergers
General
Partnership
(GP)
By
association;
Governed by
Partnership
Agreement
(if any)
Joint and
several
Equal Equal share of
profits and losses
UPA:
Withdrawal
dissolves
RUPA:
Dissociation
triggers buy-out
Control rights:
not transferable
Financial rights:
transferable
By
agreement
Limited
Partnership
(LP)
Upon filing
Certificate of
Formation;
Governed by
LP
Agreement
Joint and
several for
GPs
Limited for
LPs
GP controls
LPs passive
Distributions
shared pro rata
GP withdrawal
dissolves
Control rights:
not transferable
Financial rights:
transferable
Upon
agreement
and filing
Corporation
(C Corp)
Upon filing
Certificate of
Incorporation
; Governed
by Bylaws
Limited Directors
equal voting
SH appoint
directors
and approve
fundamental
transactions
pro rata
Distributions
shared pro rata
Perpetual Shares freely
transferable, but
often subject to
private and
federal transfer
restrictions
Upon Board
and SH
approval
and filing
Limited
Liability
Company
(LLC)
Upon filing
Certificate of
Formation;
Governed by
LLC
Agreement
Limited Member-
Managed:
Like P’Ship
Manager-
Managed:
Like Corp
Equal
distributions
Perpetual
(even with zero
members?)
Units freely
transferable
Upon
unanimous
member
approval
and filing

51. Which Entity for…
■Lawn Care Services
– for One Summer
■Real Estate Investment Group
■Taco Food Truck
■Technology Start-Up
■Law Firm

58. Conclusions
■ Entrepreneurs have many choices regarding which
type of business entity to form
– Partnerships, Corporations, and Limited Liability
Companies are the most common choices
■ Each type is subject to certain default rules regarding
key legal issues for businesses
– Formation, Liability, Control Rights, Financial
Rights, Continuity, Liquidity, and Mergers and the
most important
■ Selecting the right entity is based on which default
rules most closely fit the entrepreneurs’ business
needs

59. Related Topics
■Tax consequences of
organizational choices
■Incorporation processes
■Defective incorporation